Financing the Homestead: Improving Your Credit #1

by Jeremey Weeks

Self-sufficiency costs.

It’s a rare 5 acres that costs less than $30,000 these days.  You can easily spend $25,000 on a well.  Add in a tractor, outbuildings and fences and it’s easy to make $100,000 disappear.

Most of us don’t have that kind of cash lying around.

Credit is the answer if you don’t have deep pockets.  You trade payments over time for the option to use someone else’s money right now.

Many would-be homesteaders are without credit or have bad credit.  What this means is that you can’t get financing for a camper, tractor or maybe even a utility pickup.  You also won’t be able to get terms for unconventional loans for things like bare land.

Not having credit limits you, because you can only buy land from owners that offer terms.  The terms are often ruinous and the land marginal.  The owner expects you to make a big down payment and a few monthly payments before defaulting (because you’re a poor credit risk).  This means that you’ll only find high percentage rates and sellers that won’t have much patience for you (there’s always another sucker coming down the road).

You know this already and you’re probably frustrated just reading these few sentences.  There is hope though, even after a bankruptcy.  Let’s go over what a credit score is and where you want to be.  We also need to chat about what order you should use when you take out loans.

A credit score is a number that helps lenders guess at your ability and willingness to pay back a loan.  The lowest score you can have and still have a score is 300.  The highest you can have is 850.  I’m not going to use the terms like bad fair, etc.  Let’s just use helpful and unhelpful.  Anything under 600 is unhelpful.  700 or higher is what you should be shooting for.

600 will probably get you a bad car loan.  You might have to have a lot of money upfront and the interest rate may be bad.  If you’re fortunate, you might be able to get into a camper or RV.

You should know that your credit score is something that is fragile.  Many things can move it down at just the wrong time.  Let’s say that you have a credit score of around 650.  You want to get a pickup and a camper trailer.  You buy the pickup and drive over to the camper dealer.  And you get shot down.  Buying the pickup knocked down your credit score because you have just increased how much debt you have.

It turns out that campers are harder to finance than pickups.  You might have been able to finance the camper first, made 3 or 4 months of payments and then get your pickup.

Even getting credit like a credit card can knock down your score for a bit, even if you don’t max the card.

Just applying for a credit card or a car, etc, can drop your score a few points.

There are a lot of nuances to your credit score but let’s go over the big things to avoid…

Don’t make late payments/no payment on the credit you have.

Don’t default/walk away from debt.

Check your credit reports.  We use Credit Karma to look at comments on our reports, though their method of scoring isn’t very useful.  Look for negative remarks on your credit and deal with them.  (More on this in a later article!)

Let’s say you need to increase your credit score by over 100 points in a year.  Good luck with that.  You might be able to go from 500 to 600 in that amount of time, but it’s unlikely.  But hey, it’s good to have goals.

Some of you are already thinking about secured credit cards or secured loans.  That’s the way to go.  That’s the way we recommend to start building your credit.  BUT do it the right way.  Take the time to strategize.  Just like buying the pickup before the camper, you can hurt your credit by doing the right thing the wrong way.  We’re going to have some tips and examples but first you need to do your homework.

So, here’s what you’re going to do.   Pull your free annual credit report.  There are plenty of articles for how to do this on the Interweb.  We like myfico.com, especially since we can subscribe and get notfications when our scores change.  The following steps are going to be most helpful for the people that are under 600.

Now you know where you stand.  Don’t give up hope!  I suggest you get a notebook or binder and write down your scores and the date, or even subscribe to a credit monitoring service.  Take note of the negative remarks.

Next, write down your goals and what you think they’ll cost.  Maybe this is a parcel of land, equipment, livestock, whatever.  How much of this will you need to finance?  Prioritize your list and put it in order.  An example would be livestock being purchased after you have a well installed.

The third thing to do is research the banks and credit unions in your local area.  I don’t just mean the nearest town.  An example might be a credit union that is 3 hours away but you can still qualify as a member.

Notice that we haven’t said to research credit card companies or catalog companies that give credit?  That’s because they aren’t your friend.  The interest rates are awful and you get the minimum bump in credit for your dollar.  Worse, you have to keep doing business with those companies because what little boost they give your credit will go away when you close their account.

Banks aren’t much better.  Some are friendlier than others.  None of them are trying to rip you off, but they aren’t going to give you loans unless your credit is squeaky clean.  There are exceptions, so take note of what’s around.

Credit Unions are your friend.  Some of them at least.  So, see what credit unions are available to you.  Do you qualify for Navy Federal?  Boeing?  NASA?  If you or a close relative served in the armed forces, or if you just happen to live in the right state, you might qualify for these or other good institutions.

Got a list of banks and credit unions?  Google their names along with the word “credit”.  See if there’s anything good or bad on the Internet about them.

Cross the bad ones off your list.  Now you’re going to call the ones that are in your good category as well as the ones that are blank.  Here are some things to find out.  Do they require a certain credit score or higher to open a checking account?  How about savings?  Do they offer secured credit cards?  Do they offer secured loans for improving credit?  You’ll want to find out the terms for everything.

You should have three sets of notes now.  One set is your credit notes with the things to fix on it.  The second set is a prioritized list of projects that require credit.  The third set of notes has a list of financial institutions.

Keep your notes together.  Schedule a day once a month to review them.  This helps keep your focus and also keeps your notes up to date.  An example of a change that might come up is that you were able to trade one of your old vehicles for a small stock trailer and now the trailer comes off the project list.

This concludes part 1…

Our next credit articles are going to cover how to improve all parts of your notes.  This means increasing your credit score, lowering project costs and building relationships with banking institutions.

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